In what could be viewed as either a necessary attempt to correct D.C.’s historic economic inequalities or a foolhardy push to soak the rich amidst a downturn in the city, on Friday the D.C. Council will start debating a range of possible tax increases that could hit everything from investment income and second homes to law firms’ and lobbyists’ currently untaxed proceeds.
The hearing represents the first time in years that lawmakers have dived into the details of whether — and how — to raise more revenue and make the tax code fairer. It also comes at a time of profound change for D.C., with a new mayor set to take office in January but already facing a likely $600 million budget deficit and slowing economic growth.
“The city faces a big shortfall and we’re going to have to solve it either by cuts or revenue increases or a combination of the two,” said Ward 3 council member Matt Frumin. “The track record of the city has been to come forward with a revenue raiser at the last minute in the budget process with no deliberation around it. What this hearing is is a constructive conversation about what are our options.”
While there are differences of opinion on the wisdom of raising taxes — and how D.C. could do it — this much is uncontested: The city’s economy and the growing revenue streams it long provided lawmakers are down, in part because of a return to normality that never happened after the pandemic and also the more recent cuts to the federal workforce that have cost the city more than 36,000 jobs in the last year.
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The council has already had to deal with two difficult budget cycles that saw increasing fights over smaller pots of money for social services that have gotten more expensive — even as the need for them has remained steady.
“For the past several years we’ve said, ‘Maybe we need to wait until everyone is back in the office and DOGE is done and tourists are back.’ So we’ve been doing a lot of one-time things, and we’re coming to the end of these measures,” said Joe Bishop-Henchman, vice president of the National Taxpayers Union Foundation, an Advisory Neighborhood Commission member in Ward 5 and one of the 23 invited witnesses who will be testifying at Friday’s hearing.
“That only leaves hard decisions on spending and revenue,” he adds.
That’s especially the case now, as D.C. faces an estimated 2028 budget deficit of $600 million to $800 million that the new mayor — expected to be Ward 4 council member Janeese Lewis George — will be saddled with.
A number of tax-increase ideas have already been floated by lawmakers and hinted at by Lewis George, and those will serve as a foundation of today’s discussion. One, proposed by Ward 1 council member Brianne Nadeau, would take an existing federal tax on investment income and apply it locally to wealthy residents. The tax would produce an estimated $200 million in revenue the first year and $100 million a year after.
“The discussion around the Wealth Proceeds Tax comes down to the fact that we tax 100% of other types of income, so why aren’t we taxing these other sources of income? It’s just a matter of fairness,” Nadeau told The Sun. “People at the very top are doing very well, and it’s not an onerous tax.”
This isn’t the first time Nadeau has proposed raising taxes on wealthy households. In 2021 she led a successful charge — joined by Lewis George — to increase marginal tax rates on residents who make over $250,000 a year, with the revenue directed to cover pay increases for child care workers, more housing vouchers for homeless residents and expanded tax credits for low-income families.
But for Yesim Sayin, executive director of the D.C. Policy Center, that Nadeau’s new tax would target capital gains is risky. “This is all great when we have capital gains doing so well. But this could all go bust in a bad year. It’s very volatile,” she said. (Glen Lee, D.C.’s chief financial officer, has pointed out that one of the city’s few bright revenue spots is capital gains revenue because the stock market has been growing, though he has agreed it’s a source that is “subject to wild and sudden swings.”)
Frumin has taken a different approach, proposing his own version of New York City’s pied-à-terre tax, which targets secondary homes where the owner isn’t living on a full-time basis.
“The idea behind it is there are people who have a tax strategy which is to live in the District for one day less than six months, establish residence in a low- or no-tax state, and so they pay their property tax there and they’re here for half a year but they don’t pay income tax here. They’re employing a tax strategy, but we too have the right to employ a tax strategy to respond,” he said.
Bishop-Henchman is skeptical. “The proposal exempts members of Congress. Once you subtract those, who really is left? I would be skeptical that it would be a cash cow like NYC,” he said. Per Frumin’s office, the tax would target only 600 homeowners in D.C. and bring in an estimated $130 million over four years.
Probably the highest-profile, most lucrative and most controversial idea is a Business Activity Tax, which Lewis George has said she supports. It would take aim at law firms, consultancies and lobbying shops that are owned by nonresidents but don’t pay the city’s normal business tax because profits are treated as revenue for the owner — and Congress has prohibited D.C. from taxing nonresident income.
“The purpose of the BAT is to make sure all businesses are contributing to our shared resources, and right now there are many that are not because of the federal limitation on us,” said Erica Williams, executive director of the D.C. Fiscal Policy Institute, which favors tax increases. “A BAT helps us to broaden our tax base. That’s a good thing. That builds strength and resilience.”
Bishop-Henchman, who recently wrote an analysis of the proposed tax, questions whether it’s even legal — and notes that it would likely spur litigation. “This will be a big tax on out-of-state lawyers,” he said. In 2021, Maryland imposed a new tax on digital ads, but it was struck down this year and the state was ordered to pay refunds to those who paid the tax over the last five years.
Another challenge would be implementing a BAT. In July, the council asked the CFO to produce a report by January outlining what it would take to adopt the new tax.
Sayin believes lawmakers should focus on addressing how D.C. spends money, looking at “what drives costs, whether programs achieve their goals and which services the District can sustain.” That’s something Ward 5 council member Zachary Parker said he agrees with.
“I’ve been working to caution advocates to say that even if we were to raise taxes significantly and generated hundreds of millions of dollars, it would only keep us at pace with where we are now,” he said. “The only way we’re only going to be able to raise taxes and advance investments is by cutting our current spending. There are ways we can look at our bloated budget, look at agency spending and overspending and cut there while also making sure we fairly tax wealth.”
Still, Frumin said he appreciates the chances to broadly discuss and debate the merits and drawbacks of a number of ideas without the expectation that they will become reality soon. There’s little expectation the council would approve any tax increase this year, but it could tee something up to align with budget-writing season next spring.
Frumin also wants to proceed carefully, considering the city’s weak economy. “I will be sensitive to the possibility of different proposals driving away businesses or high-income people,” he said. “You do have to be careful of straws that break camels’ backs.”
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